The pound to US dollar interbank exchange rate has made notable gains this week. As with the euro, this could be thanks to MPs’ decision to legislate against a ‘No Deal’ Brexit.
The US dollar has also found itself against the ropes this week, because there are increasing signs that the USA’s trade war with China is now hurting America’s manufacturing sector.
For example, according to ISM this Tuesday, US manufacturing eased to 49.1 in August, below financial market forecasts for 51.0, July’s result of 51.2, as well as the 50.0 figure that points to growth. In addition, IHS Markit’s US manufacturing PMI this week arrived at just 50.3, pointing to minimal expansion.
In part, this is because Washington and Beijing have imposed tariffs worth hundreds of billions of dollars on each other in recent months, to punish each other for what they consider to be unfair trade practices. Yet these tariffs now seem to be suppressing US factory activity.
What with US factory activity slowing, and growing rumours that the United States might enter a recession in the foreseeable future, America’s central bank, the Federal Reserve, is being tipped to cut interest rates again.
In particular, the Fed could reduce borrowing costs below their current 2.00-2.25%, to make taking out loans in America cheaper, to encourage consumers to spend more on their credit cards, and for businesses to invest.
However, when the Fed cuts interest rates, this tends to make investing in USD-denominated assets less profitable for the world’s money managers, thereby devaluing the US dollar. So it could be worth watching for the Fed’s next interest rate decision, on September 17th-18th.
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